Something unusual happened when markets finally started trading Tesla shares following the release of quarterly results after the bell on Wednesday.
Typically, the stock sells off on good news as investors take profits on bets placed leading up to earnings. This time it actually soared, seeing double-digit percentage gains in yesterday’s session.
All told, Tesla has risen more than 50% since hitting a two-year low on the first trading day of 2023—a staggering run that has helped silence repeated recent calls for stock buybacks.
Tesla was oversold
The stock had been mired in a downward spiral in December, in part owing to investors harvesting tax losses before the year closed out. When December started, Tesla was still trading just shy of $200, with Morgan Stanley later predicting a bear case risk of $150. Instead it collapsed even further and eventually marked a low below $102 early in January.
So Tesla shares were due for at least a short-term rebound as bearish bets were unwound and investors bottom-fished the stock at some of the most attractive valuation levels Tesla has seen in years. One of the most important contributors to the stock’s recent downward pressure has been Musk himself, and he pledged late last month not to sell any more of his own shares this year.
Growth narrative intact
Tesla is highly confident it can reach 1.8 million vehicle sales in 2023—a good Goldilocks forecast deemed as neither so optimistic as to seem unrealistic given recessionary concerns, nor too pessimistic. While shy of the 50% annual growth rate compared with last year’s 1.3 million volume, it’s still within the longer-term growth trend predicted back in 2020.
Moreover, Musk said it was a cautious target based on last year’s painful experience with the unforeseen China lockdowns. In a normal environment, he believed 2 million would be possible for this year. And more important, that is without any volume production of the Cybertruck, which Musk said on Wednesday is first slated for 2024.
Profitability fears declining
A big fear among investors is the likely impact of recent heavy price cuts on Tesla’s margins.
However CFO Zach Kirkhorn soothed those concerns when he was asked during the call if automotive gross margins would sink below 20% this year. He replied investors had nothing to fear, since many of the recent cars delivered were already at lower price points to begin with and he still managed to deliver a 25.9% margin last quarter (albeit slightly inflated thanks to a windfall gain of $324 million from FSD, or full self-driving, revenue recognition).
Furthermore, he made it abundantly clear he expected Tesla parts suppliers would have to substantially lower the cost of their goods.
Investor Day optimism
Tesla surprised at the start of this month with news of an Investor Day in March, something it has not had in that form this early in the year since the Tesla Autonomy Investor Day in April 2019. There, the automaker is expected to reveal details about a new platform that will underpin an entry compact car below the Model 3.
Many investors were worried Tesla had no answer to China’s very affordable EVs like the BYD Dolphin and Wuling Hongguang Mini. Tesla’s competitor, tentatively dubbed the Model 2, would finally fix this problem, while also enjoying a step-change improvement in production costs. This potential volume is a key driver of long-term value.
Less Twitter drama
Remember when Musk was tweeting, “My personal pronouns are Prosecute/Fauci”? The polarizing entrepreneur made nonstop headlines owing to his increasing adoration with alt-right headlines. The overhang from his Tesla stock sales to fund Twitter has been a key contributor to bearish sentiment.
While Twitter still seems to be in critical condition, Musk said on Wednesday his personal account remained a driver of Tesla brand desirability thanks to his 127 million followers. He also has appeared less eager to court controversy in recent days, stifling calls in December for Musk either to appoint a full-time head for Twitter or stand down as Tesla CEO.
New income streams
Musk may try to rebrand Tesla as an A.I. company with its Full Self-Driving (FSD) software as the linchpin behind its efforts, but the key catalyst of the stock has always been plain vanilla car sales. That may finally be changing.
Even as FSD still remains in beta, Tesla’s energy storage business is beginning to deliver meaningful growth. Finance chief Kirkhorn emphasized that not only is it set to outgrow its vehicles business, but importantly his team is now focused on managing the income statement towards overall operating margin targets for the entire company, not just automotive—a clear sign that Tesla is beginning to have a more diversified earnings base.
But remain cautious...
The market has been here before. The Q3 call was outlandishly bullish, with Musk predicting in October an "epic" end to the year—instead what happened was a sharp downward earnings revision by Wall Street as problems mounted, in China in particular. Only then was Tesla able to clear the earnings expectations bar on Wednesday.
This month’s hefty price cuts helped ensure Tesla would qualify more vehicles for Joe Biden’s federal EV tax credits under the Inflation Reduction Act, yet it did indicate a clear demand problem as inventories bloated in size.
Musk’s insistence on Wednesday that January orders were historically high and double the rate at which it can produce cars is furthermore only a snapshot in time. It’s unlikely this is sustainable once the first few waves of demand subside.
Finally Tesla is a momentum stock. Musk’s company is among those that most regularly see sharp swings in each direction in part thanks to its enormous appeal among options traders. No individual company has a higher volume of leaps, calls and puts trading every day, regularly exceeding other megacaps like Apple, Amazon and Nvidia. These derivative contracts offer an inexpensive yet high-risk means to drive disproportionately large movements in the price of the underlying stock through trading strategies like a gamma squeeze.
In other words, Tesla can easily reverse course and enter another roller-coaster phase of downward pressure, so caution is warranted.
